Valeant Pharmaceuticals Intl Inc (NYSE:VRX) shares have “hot mess” written all of over them. Since last year’s destruction ushered the Quebec-based drugmaker into the abyss, VRX stock has been floundering.
Price gaps and false starts riddle its stock chart.
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The latest drama came in the form of a two-day 20% drop followed by a one-day 34% moonshot. The erratic action would deliver whiplash to a sturdy neck bull rider, let alone a well-meaning trader.
What’s becoming increasingly clear is that Valeant stock is the domain of degenerate gamblers deluding themselves into thinking they have an edge. But if we left it at that, the opportunity for enlightenment would be missed.
So listen up and I’ll reveal a few insights and potential trades for the Valeant dumpster fire.
How to Trade the VRX Stock Mess
The first and most glaringly obvious approach to playing Valeant Pharmaceuticals is don’t. With the many thousands of fish in the financial sea, why bother with something as gap-ridden and news driven as VRX? Lady Luck just told me you’ve yet to find favor in her heart-laced courts above. So don’t expect any aid coming from her.
But, suppose you can’t help yourself. The warmth of Valeant’s flames are irresistible and your inner moth simply can’t be restrained. What semi-intelligent avenues exist for trading VRX stock without risking life and limb?
For starters, I’m not a fan of buying or shorting the stock here.
While the unlimited reward nature of long stock trades is indeed appealing, the excessive risk is haunting. On the flip side, shorting VRX stock carries unlimited theoretical risk. And knowing that Valeant Pharmaceuticals has the potential for one-day 30%-plus rips in its DNA is enough to make even the most grizzled short seller shudder.
A far better alternative is to use the options market for your drug speculation. Low-cost, limited-risk trades can be initiated at will.
Call Spreads Beckon to Bulls
While long call options are a logical alternative to a simple stock purchase, the higher volatility of VRX is keeping option premiums rich. And a higher cost means higher risk. The solution comes in the form of a spread trade.
If you think Valeant stock has the mustard to rally higher into year-end, buy the Jan 22.50 call while selling the Jan $27.50 call for a net debit of $1.75.
The premium received from the $27.50 call drastically reduces the cost of the Jan 22.50 call. The risk is limited to the initial debit of $1.75 and will be forfeited if VRX stock sits below $22.50. The max reward is limited to the spread width minus the initial debit, or $3.25, and will be captured if VRX stock can rise above $27.50 by expiration.
Put Spreads Beckon to Bears
If you think Valeant stock is destined to end the year on a sour note, buy the Jan 22.50 put for $4 while selling the Jan $17.50 put for $1.85. The premium received from the Jan 17.50 put cuts the overall trade cost by about 50%.
The initial debit of $2.15 represents the max loss and will be forfeited if VRX shares sit above $22.50 at expiration. The max reward is limited to the spread width minus the net debit, or $2.85, and will be captured if Valeant can fall below $17.50 by expiration.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
